Stephen Elop, Nokia’s new CEO, has one tricky to-do list and not much time. To revitalize its brand, Nokia must in short order develop smartphones that effectively compete with Apple’s iPhone and Google’s Android devices, make key decisions on the future of the company’s software offerings and establish itself as a player in the United States.
For Elop, former president of Microsoft’s business division (overseeing the profitable Office franchise, among other products) the Nokia job is a chance to transform the company that dominated mobile phones through the 1990s and early 2000s. At a news conference September 10, Elop highlighted the challenges for Nokia, which has fallen behind on mobile apps and high-end touch-screen devices despite holding its position as the number-one mobile device maker in the world. “For Nokia, this moment of change represents a tremendous opportunity. Nokia can take advantage of its many unique strengths and assets and apply those to these opportunities,” said Elop. “My role as the leader of Nokia is to lead this team through this period of disruption.”
To transform Nokia, Elop will have to navigate a new culture — he’s the first non-Finnish exec to be named CEO. His hiring sent a powerful signal to Nokia’s rank and file from the company’s board of directors. “The time is right to accelerate the company’s renewal, to bring in new executive leadership with different skills and strengths in order to drive company success,” Nokia board chairman Jorma Ollila said in a news release announcing the appointment.
“Nokia isn’t like other struggling companies that are coming from behind,” notes Kendall Whitehouse, director of new media at Wharton. “Nokia is playing catch-up from the front.” Indeed, Nokia is the top smartphone vendor in the world with 38.1% of the market, according to research firm IDC, while Research in Motion, maker of the BlackBerry, is second with 17.8%. IDC projects that Nokia’s Symbian mobile operating system will have a market share of 40% in 2010, well ahead of the BlackBerry OS, Android and Apple’s iPhone platform.
However, Nokia’s lead is shrinking quickly. In the second quarter of 2007, Symbian had 65.6% market share, research firm Gartner reported. And IDC projected that Symbian is expected to lose market share to Android over the next four years. Symbian’s market share will fall to 32.9% in 2014, the firm predicted, while Android’s market share will surge from 16.3% in 2010 to 24.6% in 2014.
“Symbian had half the market just a couple of years ago,” says Lawrence Hrebiniak, a management professor at Wharton. “The smartphone market is changing rapidly and Nokia failed to capitalize. The Nokia brand doesn’t imply smartphones. It’s that simple.”
Can Elop set Nokia on the right course? Whitehouse, citing a Knowledge@Wharton interview with Elop last year, suggests that the new Nokia CEO understands the importance of user experience and design. “I came from companies where the experience is fundamentally the differentiator,” Elop told Knowledge@Wharton. While at Microsoft, one of Elop’s stated goals was to “delight our customers with unparalleled experiences” although he readily acknowledged that “Microsoft does this sometimes; other times it does not.” That software experience will be critical if Nokia is going to compete with the likes of Apple and other device makers ranging from HTC to Motorola to Samsung.
In addition, Elop will have to refocus Nokia. David Hsu, a management professor at Wharton, questions whether Nokia should pare back offerings such as its music download, mapping or app store services in order to focus more on hardware innovations and software integration.
Serguei Netessine, research director at the INSEAD-Wharton Alliance, maintains that Nokia will have to focus more on software. “As the example of Apple and others demonstrated, the future in mobile phone and especially the smartphone market, which is likely to keep growing very fast, is in software as much as in hardware,” Netessine points out. “I hope that the new CEO will be able to change the balance at Nokia in favor of thinking about software.”
Elop will have to make a few big decisions for Nokia pretty quickly, experts predict. “Given Nokia’s current position and the pace at which the mobile market is moving, [Elop] will need to produce returns soon,” says Kartik Hosanagar, an operations and information management professor at Wharton.
Navigating a New Culture
At Elop’s introductory press conference in Finland, he said he would immediately start a listening tour with employees and then implement necessary changes. Meanwhile, Elop stressed that he was moving to Finland and was getting familiar with the cultural norms. “My job is to create an environment where those opportunities are properly captured. I will immediately begin to listen,” Elop said.
According to Hrebiniak, Elop’s listening tour is familiar territory for a new CEO. Such an effort is also critical to learn the Nokia culture and adapt. “Everyone goes on a listening tour,” notes Hrebiniak. “What Elop is really saying is that he knows he has a Finnish company looking at him with apprehension. He has to show that he’s at least trying to adapt to the culture and not be just a renegade. He has to get support for the new direction.”
Hsu adds that Elop can’t go in simply offering mandates, but will need to make it clear that change needs to happen. “By hiring a software guy with experience at a large complex organization [such as Microsoft] the board is indicating that he has the authority to transform the company.” Nevertheless, Elop will have to earn buy-in from Nokia employees if any of his plans are going to work. “Nokia is about consensus building and the boardroom is conservative,” Hrebiniak points out. “Elop can’t push decisions down the company’s throat, but must convince [employees] that it makes sense to take the risks.”
Experts at Wharton maintain that Elop will have to redefine Nokia as a brand. Today, the company is known for phones, but not necessarily smart devices. In addition, Nokia’s products are seen by analysts as a step behind the iPhone and Android devices being launched by HTC, Motorola and Samsung.And Nokia’s tagline “Connecting People” may not be enough to inspire much customer loyalty. “What is Nokia really great at? It’s great at handset manufacturing,” Hsu suggests. “How does that excellence convert to smartphones that will drive replacement cycles on handsets around the world?”
The big challenge for Elop is to innovate without abandoning Nokia’s sizable user base, says Whitehouse. Fortunately, Elop’s experience at Macromedia and Adobe may help him pioneer new interfaces. “The key task for Nokia is figuring out how to add value [in a market where] user experience is the differentiator,” he says. Nokia has a strong brand, but it doesn’t scream innovation, notes Hosanagar. “When I think of Nokia, I think of sturdy, reliable but somewhat boring phones. Cool smartphones with great apps don’t come to mind at all. Nokia needs to rebrand itself.”
Fortunately, Nokia has a few case studies to look to. “Nokia could learn a lesson from the gaming consoles market,” says Hosanagar. “Nintendo, for example, was the dominant player in the gaming market much like Nokia has dominated the phone market in the early 2000s. Nintendo lost most of its market share to Sony and Microsoft by the mid 2000s. Nintendo managed to rebound with a dramatic innovation [the Wii game console] and rebranding to take back the number-one position in a matter of two or three years. The gaming market will evolve and market share will be gained and lost, but Nintendo’s resurgence with the Wii offers a good parallel for Nokia.”
If Nokia can provide something innovative to leapfrog competitors it will woo customers again. “From a strategic point of view, there’s not a lot of brand loyalty in smartphones beyond Apple,” Hrebiniak suggests. “If Nokia comes up with something new, those gadgets will attract new customers.”
The Fate of Symbian
At the Nokia World conference in London September 14, the company launched a family of smartphones powered by Symbian 3, the latest version of the mobile operating system with 250 new features including high-definition video playback, better multi-tasking and improved touch navigation. According to company officials, the new devices represent the company’s “fight back to smartphone leadership.” Those devices, along with a new app store and mapping tool, should buy Elop a little time to ponder Nokia’s software strategy.
Analysts say that software is what fuels interest in Apple and Android devices potentially at the expense of Research in Motion, which makes the more business-focused BlackBerry, and Nokia. In a recent report, investment firm Piper Jaffray predicted that Nokia and RIM would ultimately be forced to adopt a third party operating system like Google’s Android platform.
Piper Jaffray’s analyst team wrote that competitors like RIM and Nokia have “a fundamental identity problem…. Google is clearly a software company focused on making Android a great mobile OS. Apple is clearly a software company focused on making a great mobile OS and [taking] it a step further by providing integrated hardware,” Piper Jaffray reported. “We view competitors like RIM and Nokia as hardware companies that are dabbling in software.”
Experts at Wharton were mixed on whether Nokia should drop Symbian in favor of Android or Microsoft’s forthcoming Windows Phone 7 operating system. On one hand, Nokia may lose any competitive edge by adopting Android since multiple companies already use the operating system. Then again, Nokia could focus on what it does best: Manufacture phones. “Just imagine a partnership of Nokia and Google’s Android,” Netessine notes. “Nokia would become the largest user of Android software and could probably negotiate some Nokia-unique features and customization.”
VentureBeat, a blog covering the Silicon Valley, reported on September 23 rumors that Nokia is considering Windows Phone 7 as an operating system for future handsets. Under this scenario, Nokia would offer both Symbian and Windows Phone 7 devices. Microsoft and Nokia are already partners for a mobile version of the software giant’s Office suite. Elop said there are improving lines of communication between Nokia and his former employer.
However, Hrebiniak suggests that offering multiple operating systems on Nokia devices may be a strategic mistake. “Don’t get caught in the middle,” warns Hrebiniak. “Analyze the technologies — Microsoft, Android and Symbian — process the information and make a decision.”
Not owning the software platform used in its phones means that Nokia would be “giving up significant revenue and profit potential. So it wouldn’t be my first strategy,” Hosanagar says. “But if Nokia can’t get its act together in a year, I think it may well be the only thing to do. I think Android on Nokia could be very appealing to consumers. But Nokia is not going to embrace the Android bandwagon so soon. There’s the issue of giving up on a lucrative software platform. And then there’s the question of whether a former Microsoft exec will so easily embrace Google’s Android.”
According to Hsu, the decision on Nokia’s operating system of choice is one of the most important decisions Elop will make. “It’s a difficult decision. If Nokia goes the Android or Windows Phone 7 route, there’s nothing unique relative to rivals. Nokia would forgo the software opportunity and just accept a license.”
Cracking the U.S. Market
Nokia’s remaining big decision will revolve around entering the U.S. market. Nokia is a global smartphone leader, but doesn’t focus on selling to American consumers. For the second quarter ending June 30, Nokia reported that North American sales were down 16% to 223 million euros. North America (the U.S. and Canada) is Nokia’s smallest market and accounted for only 3% of the company’s total revenue of 6.8 billion euros in the second quarter, according to Nokia’s earnings release.
But experts at Wharton note that Nokia has to come up with a plan for breaking further into the U.S. market. Nokia lacks important relationships with carriers in the U.S. because Europe, China and Asia Pacific are the company’s biggest markets. “It’s hard to ignore one of the [world's] largest markets,” Hsu points out. “What Nokia learns in the U.S. could benefit operations going forward. What happens in the U.S. could happen in India five years from now. You have to be a market participant to learn those lessons.”
Hsu acknowledges that a Nokia entry into the U.S. may not pay off, but says that Elop has to take a chance. “What’s worse? Being perceived as a second tier player and not incurring costs, or damaging the company’s reputation as an innovator? Nokia should think of the U.S. as an investment to innovate.”
Elop has indicated that the U.S. will become more of a priority for Nokia. In an interview with the Financial Times, Elop said that the “new patterns of communication and innovation” are occurring first in North America. “That’s a shift from years before when the development of the mobile industry tended to start in Asia and move through Europe and then to North America. Now there’s fresh innovation in North America and it’s critically important for Nokia to be participating in that market.”
Indeed, Nokia is already showing that it is taking the U.S. more seriously. On September 23, Nokia and AT&T announced a plan to offer $10 million in prize money to software developers that come up with the best apps for Nokia’s high-end N8 device. These apps would appear exclusively on Nokia’s Ovi Store, which competes with Apple’s iTunes app store and the Android Market. Nokia described the effort as “a clear message that we are serious about the North American market.”
“The fact is that Elop has to move pretty quickly,” Hrebiniak notes. “I don’t know how much of a honeymoon period he has.”